TMI Blog2004 (5) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India. As per the approval given by the Reserve Bank of India, the applicant company can pay interest on these debentures at a rate not exceeding 14% p.a. and only to the extent of profit available. It is also stated that Weststar Investment Holdings Ltd. is not having any place of business or a permanent establishment in India. The applicant company made profits during the year ended 31 st March, 2002 and the interest liability being more than the profits available, entire profit will be paid by way of interest to the foreign company. 2. The applicant has filed this application U/s. 245Q(1) of the Income-tax Act, 1961 ("the Act") and based on the above facts has sought the ruling of this Authority on the following question :- "Whether in the facts and circumstances of the case and having regard to the terms of borrowal with the foreign company and also the clauses of the Double Taxation Avoidance Agreement between India and Mauritius, the applicant is required to deduct tax at source under the laws for the year ended 31-03-2002 on the payment of interest to the foreign company especially when the foreign company has no permanent establishment in India and int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x department of Mauritius; * The transaction giving rise to the debt claim has been approved by the Reserve Bank of India. 6. It is also claimed that since the foreign company has mere investment by way of shares and debentures in the company, neither Article 7 (Business Income) nor Article 14 (Professional Income) of the DTAA with Mauritius has application. 7. In Annexure to the application, reliance has been placed on the ruling by this Authority in the case of DLJMB Mauritius Investment Co. Ltd. Vs. CIT (1997) 226 ITR 268(AAR). It is stated that in this case the AAR has held that Reserve Bank of India can be described as Government for purposes of Article 11 of the DTA Agreement with Mauritius. Based on the said ruling, the applicant argues that the approval granted by the Reserve Bank of India amounts to approval by the Government and whatever interest is payable under the Agreement to the foreign company is not liable to tax in India as it is exempt under Article 11(4) of the DTAA between Indian and Mauritius. 8. In the case of DLJMB Mauritius Investment Co. Ltd. Vs CIT, supra, the relevant question and the ruling given by the Authority was as under :- " Qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case, the applicant has sought ruling on one question, i.e. taxability or otherwise of the interest paid by it to Mauritius company, only the issues for consideration is whether in the facts and circumstances of the case and ruling of the AAR in the case of DLJMB Mauritius, the interest payable to Weststar is exempt from tax either under Section 10(15)(iv) of the Act or under Article 11(4) of the DTAA between India and Mauritius. Though the applicant has not sought ruling in regard to exemption under the domestic laws, the same is also being considered because of the ruling given by the Authority in DLJMB case. 13. The first question that comes up for consideration is whether approval granted by the Reserve Bank of India in all the cases, amounts to approval by the Government. 14. As already stated that for this proposition, the applicant has placed reliance on the Ruling given by this Authority in the case of DLJMB Mauritius Investment Co. Ltd., supra. In DLJMB case, the Authority observed as under:- "20…………..A question may be raised whether the FIPB or the RBI can be said to be the Government of India for the purposes of this Article. Though the tax treaty do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 1995-96 were released by the Government through Press Note - F.No.4(37)/95-ECB, dated 28.2.1995. Part (1) of the guidelines is general and Part (2) relates to Policy and Procedures for External Commercial Borrowing Policy. Item (x) of Part (2) reads as under:- "(x) - As regards withholding tax exemption, all interest payments, commissions/fees etc. related to external commercial loans exceeding one year's maturity and short-term borrowing of one year or less would be subject to the current practice till further review." * The current practice in regard to granting of tax exemption was reiterated explicitly in the Press Note F.No.4(48)/96-ECB, dated 19.6.1996 in regard to guidelines on Policy and Procedures for ECBs for 1996-97. Paragraph numbers 16 and 17 of Part I(ECB Policy) are relevant for the purpose of the point in issue and they are extracted below :- "16. Exemption from withholding tax - All interest payments and fees etc. related to external commercial borrowings would be eligible for withholding tax exemptions under section 10(15)(iv)(b) to (g) of the Income-tax Act, 1961. Exemption under section 10(15)(iv)(b),(d) to (g) are granted by Department of Economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to be assessed on the basis of the domestic law or in terms of the DTAA between India and the country of his residence, which ever is more beneficial to him. This interpretation gets support from the fact that even after the withdrawal of tax exemptions provided under section 10(15)(iv), the exemption approved for the purposes of Article 11 of the DTAA with Mauritius is still available. 24. It, therefore, follows that exemption of interest income under Section 10(15)(iv) of the Act is independent of the tax exemption provided under Article 11(4) of the DTAA with Mauritius . In the circumstances, separate and transaction based approval for tax exemption is necessary under Article 11 of the DTAA with Mauritius. Since in the case of the applicant, there is no evidence to show that tax exemption under the Act has either been granted by the Department of Economic Affairs or by the Department of Revenue, and the approval of the loan granted by the Reserve Bank of India for the purposes of FERA does not amount to tax exemption under the Act, it is for consideration, if the approval to the loan granted by the RBI can be considered as tax exemption by the Government under the DTAA. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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